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The U.S. Saving Clause Facilitates the Expatriation Tax in 877A

What is evident is that our governments do not understand the effects of citizenship-based taxation. They did not believe us when we told them it was not just an issue of possibly not owing annual income tax. They did not believe us when we told them our tax-deferred accounts would be taxed. They did not listen when we told them sale of our (Canadian & others) principal residences would produce capital gains which would be taxed.

Will they listen when we tell them that “just renounce” (as if it were simple) will cause some to pay an Exit Tax that will cause a non-US pension valued as if it were paid out and taxed as regular income, in addition to capital gains on the rest of the assets? On those who have not just left the U.S. but left long ago, gaining all this as residents of the countries they live in?

This money belongs to the coutries where it was earned.

It DOES NOT belong to the United States.

We must repeat this over and over and over again until they get it:

It is abundantly clear that the United States is using it’s tax jurisdiction over U.S. citizens (a definition it can change at will) to attack the economies and sovereignty of other nations. In the event that this problem is NOT addressed, countries will no longer be able to afford the “fiscal risk” of accepting U.S. citizens as immigrants.

To put it simply through the S. 877A Exit Tax the United States is claiming the right to confiscate assets that are sourced in Australia and that were most likely acquired while the owner resided in Australia. Under normal rules of International taxation (as you describe in the first post of your trilogy http://fixthetaxtreaty.org/2017/01/12/explaining-the-saving-clause-i/) Australia would have the first (and presumptive) right of taxation on both of these assets. But what happens via the S. 877A Exit is that:

On the day before renouncing U.S. citizenship (while the person is still a U.S. citizen) the United States “swoops in” (steal it while we can) and claims the right to impose a preemptive tax on assets on which Australia clearly has the first right of taxation. In other words, the United States swoops in to impose taxation before Australia imposes taxation on the asset.

To put it simply:

This effect of the S. 877A Exit Tax is one of the most egregious examples of the United States “using it’s citizens” as “Trojan Horse Soldiers” to steal from the economies of other nations!

As described by one commentator:

“Although international tax law does not prohibit countries from imposing exit taxes
on their residents, there could be situations in which the levy of a tax on capital gains by a legislative fiction in one country infringes on a bilateral tax treaty.

In this respect, the Netherlands Supreme Court has ruled that the tax on a fictitious
alienation in specific circumstances can be incompatible with treaty law. If a taxable event was allocated for tax purposes to one state, the other state cannot by a later legal fiction attribute taxing rights to itself regarding a purchase or alienation that did not actually occur.”

Your post has proposed three possible solutions to the problem of the “Savings Clause”. How might each of these proposals defend Australia from the S. 877A Exit Tax? Interestingly the proposals operate differently.

1. Removal of the savings clause – (Australia does NOT agree that the USA can impose taxation on any person who it deems to be a U.S. citizen):

Th “Removal of the Savings Clause” does NOT mean the U.S. agrees that the U.S. WILL NOT unilaterally impose taxation on Australian assets. The United States might impose the taxation anyway. The precise effect of the removal of the “savings clause” would need to be considered on an “article by article” analysis of the treaty. If the savings clause were removed the individual treaty provisions would have to be strengthened to give Australia the exclusive right to impose taxation on Australian assets.

2. Citizenship tie breaker – (if included in the treaty this would mean that the U.S. would agree to NOT impose taxation on any Australian citizen resident in Australia):

This would ensure that the S. 877A Exit Tax could NOT be applied to dual U.S. Australian citizens living in Australia. It would protect the individual who is a “dual citizen”. It would NOT protect the U.S. citizen resident of Australia who was NOT an Australian citizen.

3. Tax Base Preservation Clause – (if included this would mean that the U.S. would agree to not impose taxation on any Australian asset)

This would protect both the individual (whether dual citizen or not) AND would protect the government and economy of Australia.

It is abundantly clear that the United States is using it’s tax jurisdiction over U.S. citizens (a definition it can change at will) to attack the economies and sovereignty of other nations. In the event that this problem is NOT addressed, countries will no longer be able to afford the “fiscal risk” of accepting U.S. citizens as immigrants.
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